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Income velocity and non-GDP transactions in the UK

Biefang-Frisancho Mariscal, Iris; Howells, Peter

Authors

Iris Biefang-Frisancho Mariscal

Peter Howells



Abstract

It is widely reported for many countries, including the UK, that income velocity has been highly variable around a declining trend in recent years. This paper advances the following hypothesis. The demand for credit and hence the broad money stock are influenced by total spending in the economy, rather than spending only on newly produced goods and services. Since total spending in the economy has generally increased relative to GDP (mainly because of asset transactions) credit and money have expanded more rapidly than GDP, with the resulting fall in income velocity. Using quarterly data from 1975 to 2008, we estimate a vector error correction with income velocity as the dependent variable and the ratio of total to GDP transactions as an explanatory variable. The results show substantial support for the hypothesis and raise (further) doubts about the information content of broad money aggregates for inflation targeting central banks. © 2012 Copyright Taylor and Francis Group, LLC.

Citation

Biefang-Frisancho Mariscal, I., & Howells, P. (2012). Income velocity and non-GDP transactions in the UK. International Review of Applied Economics, 26(1), 97-110. https://doi.org/10.1080/02692171.2011.580270

Journal Article Type Article
Publication Date Jan 1, 2012
Journal International Review of Applied Economics
Print ISSN 0269-2171
Electronic ISSN 1465-3486
Publisher Taylor & Francis (Routledge)
Peer Reviewed Peer Reviewed
Volume 26
Issue 1
Pages 97-110
DOI https://doi.org/10.1080/02692171.2011.580270
Keywords cointegration, error correction model, credit supply
Public URL https://uwe-repository.worktribe.com/output/951628
Publisher URL http://dx.doi.org/10.1080/02692171.2011.580270
Related Public URLs http://www.informaworld.com/smpp/title~db=all~content=t713426883




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